Should investors be worried about massive inflation in the near future? I don’t believe so, even though I grew up with Milton Friedman and his show, “Free to Choose,” on Public Television.
Many investors are girded for rampant inflation because the Federal Reserve is printing money at a record pace. This is one of the many strategies in place to help us avoid a deflationary cesspool. Many worry this medicine will kill the patient.
Inflation is certainly not dead, and in my opinion it will definitely challenge us in the future. But in the near-term, consider me climbing the deflation wall of worry. Excess capacity and consumers’ relative unwillingness to spend are of more immediate concern than rampant inflation.
How can I say this in light of the white-hot printing presses? The money being printed is also being hoarded. Cash is king. Lending institutions are holding on tight. The consumer savings rate has jumped from less than 1 percent of personal disposable income to almost 7 percent. This pullback from our profligate ways has brought about excess capacity in our economy. Unemployment is approaching 10 percent, and capacity utilization at factories is under 65 percent.
All of this slack will keep a lid on inflation – for the time being. You might be wondering about the long run. We will be faced with a conundrum (one of Alan Greenspan’s favorite words) should consumer demand take off while the Federal Reserve printing presses are on high. As citizens we owe it to ourselves to insist upon transparency in government as well as consistency. Every effort to politicize our independent Federal Reserve should be resisted.
What should investors do in our current environment? Stock investors should focus on companies with a lot of cash on their balance sheet. Attention should also be directed to companies with the ability to pay and increase their dividends. Many stocks pay a much higher dividend yield than can be obtained through the short-term bond market. Bond investors may find it pays to search local financial institutions for CD specials. Depending on their balance sheets, these financial institutions may offer some very attractive rates.
What should consumers do in this environment? This is a tough business environment, especially for small business owners. “Shop Local” takes on more significance should you desire to support your local merchants. On a positive note, be ready to enjoy increased variety and uniqueness as well as service levels from these businesses as the survivors strive to differentiate themselves
